In the past, many supply-chain decisions were heavily influenced by tax considerations. Tax efficiency could quite often trump cost and other factors. Moves towards global minimum effective tax rates and other playing field levelling measures are changing the game and may force companies to view decisions on where to locate subsidiaries through a different lens.
This could have implications for Ireland. Many of our leading exporters are subsidiaries of global multinationals and form part of their supply chains. For many years, Ireland’s 12.5 per cent corporate tax rate was a key element of its proposition to these firms. That is now changing and from next year companies with turnover of more than €750 million will pay a top-up tax to bring the rate to 15 per cent.
And then there is Pillar One of the OECD Base Erosion and Profit Shifting proposals. This aligns taxing rights more closely with local market engagement — where the products and services are actually sold — and departs from using physical presence as the main basis. This could see the profits earned by companies located here being taxed in the US, the UK, France or any other country where they have sales.
“Tax considerations do come into play, particularly in the context of global tax reform,” says Mazars tax director Alan McManus. “In future there will be competition for a share of the corporate tax pie. Countries are going to look at supply chains and see if they have taxing rights on activities occurring within them. If there is no corporate tax advantage to retaining existing supply chain arrangements companies may consider moving it closer to home. If a pharmaceutical company is serving US customers from here and is going to be taxed at the same rate there as in Ireland the parent company might decide to move the supply chain closer to that market.”
Getting solid legal advice early in your company’s journey is invaluable
Water pollution has no one cause but many small steps and working together can bring great change
Empowering women in pharma: MSD Ireland’s commitment to supporting diverse leadership
Super nutritious, wildly versatile and oh, so tasty: Make potatoes your go-to food
While this is a possibility, Ibec chief economist Ger Brady believes global tax reform will not result in a major shift in supply chains. “It is not a major risk for Ireland,” he says. “It will put more focus on having decision-makers and tax in the same country. We will probably have more people making decisions in this country. For the moment, I don’t see how the minimum tax rate will affect our place in global supply chains.”
Immediate impact
And the risks posed by pillar one appear to have receded. “Progress on that seems to have stalled,” Brady notes. “There is almost no chance that the US Congress will pass it in its current form. It’s kind of hard to see why anyone else would do it if the US doesn’t.”
McManus agrees that there will be no immediate impact on supply chain decisions. “The effect will be longer term. It’s a question of what companies will do if they are making changes in the future. If they are going to make changes anyway, tax will be a consideration. Ireland will have to reorient its marketing and emphasise the soft benefits of operating out of Ireland like talent availability and economic and political stability.”
Corporation tax isn’t the only consideration of course. “Companies will have to look at indirect taxes like customs duties and VAT as well and what their impact will be in a changed market environment,” McManus notes.
And that should be good news for Ireland with its continuing membership of the single market.